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Can Wanhua join hands with independents in integration?

JLCFebruary 11 , 2019Victor Yang

Guangzhou (JLC), February 11, 2019--Yantai in China’s Shandong province may resume work on a large refining-chemical complex and have Wanhua Chemical join hands with independent refiners in integration.

The construction of the project have been officially confirmed, as Yantai said at a recent meeting that it should be actively involved in Shandong’s refiner integration and try to get the construction of Wanhua Yulong New Refining Material Co. (Wanhua Yulong, transliteration)’s refining-chemical project started as soon as possible.

This project may comprise crude distillation units with 20-40 million mt/yr (400,000-800,000 bbl/day) of refining capacity in total. It was to be located on the Yulong Petrochemical Base on the Yulong Island, according to the environmental impact assessment (EIA) for the petrochemical base released in 2016.

Independent refiners will be encouraged to become shareholders of this project. The Yantai government has recently discussed with some independent refiners about exchanging crude oil quotas for stakes in the project, but there is no conclusion yet. It is not clear yet how independent refiners will participate in the integration and how many companies will be willing to invest in it. Wanhua will run into lots of difficulties before it can cooperate with independent refiners in the refining-chemical project.

First of all, Wanhua is a chemical company and it has not stepped into the upstream refining sector yet, though the company has recently started construction of its phase-II 1 million mt/yr ethylene project. It is yet to be found out how big a say Wanhua has among independent refiners and whether it can lead a refiner integration project. It is also doubtful whether Wanhua, a listed company with good profitability, will be willing to integrate independent refiners deep in debts.

Wanhua Chemical is a comprehensive chemical enterprise developed from a polyurethane producer. The company is engaged in new chemical materials and its business covers the polyurethane industry, the petrochemical industry and functional chemicals and materials.

Second, it was said that independent refiners will probably exchange crude oil quotas for stakes in the integrated project, but JLC considers crude oil quotas as iffy since the quota for a single refiner is set to change annually. If additional quotas and the difference between refiners are not taken into consideration, the quotas for a single refiner will drop annually as the quotas for next year will hinge on the refiner’s use of its quotas for the previous year. For some independent refiners, it is still difficult to use up their quotas, particularly when the country’s economy is under downward pressure and the oil market is becoming increasingly oversupplied amid the commissioning of refining-chemical complexes in coastal areas. It will be difficult to fix an independent refiner’s stakes in the integration project on the basis of the refiner’s crude oil quotas, and it will be a challenge to get refiners to accept this.

Third, the sales of refined oil from future 20-40 million mt/yr refining-chemical projects will be a challenge, even if independent refiners with stakes in an integration project shut down their units after the new project comes on stream. This is because of a deepening supply glut when several large refining-chemical complexes in the coastal regions are coming online and growth in domestic refined oil consumption is slowing down. Even if the way BP and Dongming Petrochemical cooperated in petrol stations can be popularized, it is still in question how much refined oil from independent refiners can be distributed via joint-venture petrol stations. After all, among China’s over 100,000 petrol stations, independent refiners’ stations account for less than 1% and the share for foreign and joint-venture petrol stations is low at 3%.

Fourth, to integrate some independent refiners to Yantai where there is no refiner yet, it will be crucial to get other cities’ cooperation. Independent refiners are large taxpayers, and moving a refiner away from a city means the loss of a large taxpayer and a drop in the city’s tax revenue.

Fifth, the location of the new project is still uncertain. The project was said to be located in the Longkou’s Yulong Island in the Bohai Bay, but the Bohai Bay is not among China’s seven large petrochemical bases under planning. In addition, the largest terminal in Longkou port is only 100,000 dwt, and the development of the local terminals will be restricted by port conditions.

There will also be great resistance from local residents if the Yantai government locates the project on the Yulong Petrochemical Base on the Yulong Island. The Wanhua Yulong project was called off by Longkou, a prefecture-level city of Yantai, in May 2016 because of strong resistance from the public after the EIA for the petrochemical base was released. The public was greatly concerned about pollution as the island, which was reclaimed from the sea by Nanshan Group in 2015, was close to residential quarters.

In a nutshell, the Wanhua Yulong project is subject to various uncertainties.

Anyway, the re-emergence of the project echoed Shandong’s plan released in November 2018 for speeding up the high-quality development of the seven large-energy-consuming industries and integrating independent refiners. According to the plan, Shandong will build 30 million mt/yr refining-chemical projects in the petrochemical base in north Shandong and chemical industrial parks. At the same time, it will also encourage leading enterprises to cooperate and build 30 million mt/yr complexes, the plan says. “After a new complex comes online, the old units at these enterprises will be removed”. The province aims tocomplete theintegration of independent refiners each with no more than 5 million mt/yr of refining capacity before the end of 2025 and achieve balanced development of the refining industry and high-end downstream petrochemical products.

Shandong plans to integrate independent refiners with good intentions, but the progress in refiner integration will continue to be impacted by various factors. Whether the province can harmonize its reform with independent refiners’ original development plans, harmonize different cities’ development plans for independent refiners and tackle refiners’ debt problems, as well as the government’s effort for integration and support for independent refiners will all impact the progress in integration. JLC will continue to pay close attention to the development.

About the Yulong Petrochemical Base:

The Yulong Petrochemical base in Longkou is a joint venture between China’s Nanshan Group and Singapore’s JURONG International. The two companies signed a memorandum of cooperation in June 2014, to reclaim land from the sea and build a petrochemical base in China’s Bohai Bay.

According to the EIA for the Yulong Petrochemical Base, the base will boast a refining capacity of 40 million mt/yr, a production capacity of 2.20 million mt/yr for ethylene and aromatic units with a total production capacity of six million mt/yr. Construction of the petrochemical base was scheduled for 2016-2035, with 2016-2020 as the period for the launch of the project, 2021-2025 as the medium term and 2026-2035 as the long term.